13 common mistakes first-time home buyers should avoid

13 common mistakes first-time home buyers should avoid

Nothing is more satisfying than having one’s own comfortable space to return to at the end of the day. However, in today’s world, characterized by unprecedented population growth and rising real-estate prices, buying a home remains a distant dream for many. Furthermore, several individuals trying to buy homes are unprepared for certain challenges they may face. Keep reading to learn about common mistakes home buyers should avoid while investing in real estate.

Exceeding one’s set budget limit

Often, home buyers get carried away by the additional amenities and space offered by properties beyond their budget range and face the consequences of huge EMI installments later. While expensive houses may offer more facilities, home buyers must stick to their budget ranges for optimal financial planning and to avoid debt traps.

Not being pre-approved

Being pre-approved to buy a home can significantly boost one’s house hunt. It can help buyers understand what denomination of the total house price they can afford and to what extent they would require help. Buyers can also determine a budget range by getting pre-approval from mortgage lenders. This process helps them look for affordable homes and stay within their set limit. Thus, although a pre-approval is not a final mortgage approval, it gives buyers a sense of security and increases their appeal among sellers.

Not consulting a reliable real-estate agent

While it is possible to purchase a home without the help of a real estate agent, such agents are experts in the industry. They can provide buyers – particularly first-time buyers with little or no knowledge of home buying – with systematic guidance. Home buying is a life-changing decision; proper assistance can help one obtain the best deals on their dream house. However, it is important to find reliable real estate agents with considerable experience and relevant qualifications and those with positive reviews and word of mouth.

Failing to improve one’s credit score

A significant aspect of getting loan approval is one’s credit score. Not keeping track of this score can impact loan approval or leave one with less favorable options. The most effective way to improve one’s credit score is to pay one’s bills on time. Additionally, one should avoid applying for multiple credit cards or loans within a short period. Checking one’s credit score frequently helps improve and maintain the score.

Not estimating the cost of homeowners’ insurance

Homeowners’ insurance is property insurance that provides financial compensation for damages to one’s home and/or belongings. The cost of this insurance plan may be found in one’s closing disclosure document and should be considered while calculating the aggregate expenditure to buy a home.

Not availing of loans supported by the government

Government-backed loans, such as those supported by the Federal Housing Administration or the U.S. Department of Veterans Affairs, should be explored by home buyers as these loans may be more affordable, with lower interest rates and processing charges.

Not considering future financial needs

Most home buyers often ignore other future financial requirements while purchasing a home. Children’s education, healthcare for elderly family members, and emergency funds are just some financial needs for which one must plan in advance. Thus, these factors must be considered while setting the budget for homes.

Buying a home before clearing existing debts

Besides affecting one’s credit score, existing debts add to one’s financial burden. Buying a home is a huge expenditure and entails several overhead expenses, even after systematic planning. Thus, it is imperative to become debt-free before applying for a home loan and investing in real estate.

Making a minuscule down payment

While a home loan with a small down payment amount may seem tempting, it can cost borrowers a massive sum in the long run. Smaller down payments typically entail higher interest rates and can increase one’s financial crunch. Therefore, it is advisable to pay 20% of the total cost of one’s home as a down payment to avoid paying for private mortgage insurance.

Failing to consider overhead expenses

One can never be too financially prepared while purchasing a home. Even after figuring out the total amount, the principal loan amount, and the interest rates, various other expenses must be considered, including maintenance deposits, stamp duty, registration fees, service tax, homeowners’ insurance, furniture and home decoration costs, and brokerage. Although unexpected expenses are likely to occur, it is best to list all possible expenditures and save or invest accordingly.

Not discussing the possibility of a no-closing-cost deal

A closing cost is an amount the home buyer pays over and above the house to complete the transaction. Usually, the buyer must pay these closing costs before closing the loan. Accounting for 3-5% of one’s loan balance, these costs may include attorney fees, appraisals, taxes, title insurance, etc. A no-closing-cost deal implies that all such closing costs are added to one’s mortgage. Thus, the monthly payment is higher, but it prevents home buyers from paying lump sums during loan closing. Alternatively, the lender may pay for such closing costs but charge a higher interest rate from the borrower.

Not preparing donors for conditions associated with gift funds

When family members or friends provide gift funds to help one purchase a home, they must submit documents disclosing these gift funds’ source(s). However, donors may feel apprehensive about disclosing such personal information. Thus, home buyers should prepare them beforehand about such conditions regarding gift funds.

Not having financial documents in hand

Today, several lenders have established strict measures to detect mortgage fraud. Moreover, misleading information on one’s loan application can stall or terminate loan approval. Hence, in addition to being genuine and authentic in their application forms, home buyers should keep their financial documents, such as bank statements, handy in case any clarifications are required.